Tuesday, August 06, 2019

The Trillion-Dollar Grift: The Long-Term Plan for US-China Decoupling

 There is a certain amount of "OMG how did we get here??" handwringing over the escalating trade war between the US and China.


The decoupling strategy of the US China hawks is proceeding as planned.  And economic pain is a feature, not a bug.

Below is the script of a Newsbud China Watch episode I did on September 26, 2018, when the outlines of the US strategy were already clear.

Some further comments.

Failure of trade negotiations was pretty much baked in, thanks to Lightizer's maximalist demands.

And that was fine with the China hawks.  

Because their ultimate goal was to decouple the US & PRC economies, weaken the PRC, and make it more vulnerable to domestic destabilization and global rollback.

If decoupling shaved a few points off global GDP, hurt American businesses, or pushed the world into recession, well that's the price o' freedom.

Or at least the cost of IndoPACOM being able to win the d*ck measuring contest in East Asia, which is what this is really all about.

Keeping the negotiations creeping along while encouraging the decoupling dynamic through tariffs & sanctions allowed the China hawks to dodge the onus of hurting the US economy for the sake of US hegemonic goals.

Now, as we're entering a phase of pretty much open economic warfare, maybe that mask is ready to drop.

One of those items of academic interest is whether Trump was ever interested in a trade deal & return to normalcy.  I'm guessing Yes.

But the US military is pretty much Trump's only solid Beltway constituency.  They want a China confrontation & he went along, since the costs of the confrontation in his main political constituency, the stock market, seemed manageable..  

The continual bait-and-switching on the trade deal (we got a trade deal; oops more tariffs!) is a classic from the Trump playbook: when your opposite number seems ready to deal, it's time to squeeze harder. 

This was catnip to the China hawks.  As long as the negotiations dragged on, the decoupling dynamic could continue pretty much unexamined.

Now maybe we've reached the point of no return, since it looks like the PRC has decided it's more important to signal its capacity to take punishment than its eagerness to make a deal.

Again, a happy day for the China hawks.  It's war!  At least economic, for the time being.

Now, if a recession does hit, one can consider it a signal that the US finance/business bunch have priced China out of their economic models.

The next step beyond economic warfare is strategic/military rollback.

Decoupling the US economy from China, squeezing China related expectations out of the market, and shifting to a war with China footing insulates the US military from economic and political pressures to pursue a more moderate course in East Asia.

I expect IndoPACOM to agitate for an aggressive program--via its allies in the Philippine military--to confront the PRC over its artificial islands, especially Mischief Reef, in the South China Sea.

These facilities are a major affront to IndoPACOM's manhood and must be removed.  And that means war, or something close to it.

Remember, as IndoPACOM jefe Admiral Davidson put it: "China controls the South China Sea in all scenarios short of war." 

He's not making these statements to signal American surrender, folks. IndoPACOM is China hawk HQ.

As I've discussed elsewhere, the US has put its ducks in a row to provide military backing to anti-China moves that the Philippines initiates in the South China Sea.

Also, assuming the elections in Taiwan go America's way, the decoupling of the Taiwan and mainland economies will accelerate and military cooperation between Taiwan and the US and Japan will increase.

Between the global economic slowdown and the regional military buildup, I guesstimate the cost of taking on the PRC at a trillion dollars over the next decade.

But like they say, War with China: one trillion dollars.  Postponing the loss of US hegemony in the Pacific: priceless.

The September 26, 2018 script:

It’s not a trade war, it’s the long war.  Cold War 2.0.  With China.

Donald Trump introduced tariffs on another $200 billion dollars of Chinese goods.  The Chinese responded but did not match, let alone escalate, with tariffs on $60 billion in US goods.

This round of US tariffs stopped at 10%, that’s short of pure apocalypse; that’s been put off until December, when the US will raise the rate to 25% if things don’t go Trump’s way.

U.S. businesses are starting to get a little nervous, since the PRC is apparently going to wait and see if the US Congressional mid-term elections deliver the promised blue wave of Democrats that will restrain Trump and maybe even impeach him, instead of hurrying to Washington to negotiate.

Per the Washington Post:

As the president pursues his uncompromising approach to China, business leadrs are growing increasingly frustrated.  The U.S. Chamber of Commerce, National Association of Manufacturers and the National Retail Federation were among those blasting the administration's use of tariffs as costly and counterproductive.

But guess what—to China hawks, the miseries of US businesses in China is a feature, not a bug.  And since China hawks hold the whip hand in the Trump administration, expect more, not less of this.  Per the Washington Post report,

Some administration hard-liners would be content to see the trade and investment restrictions lead to a decoupling of the U.S. and Chinese economies

Decoupling the U.S. and Chinese economy would be a significant milestone in the new cold war against China.

That’s because decoupling is at the heart of containment classic.

US China hawks have always pushed the talking point, we don’t have a containment strategy.

That’s because the essence of containment against the Soviet Union as formulated by US diplomat George Kennan in 1946, was that the USSR had chosen the path of autarky—self-sufficiency instead of integration with the economies of the West—in order to sustain its repressive domestic system.  

Therefore, Kennan successfully argued that the United States and its allies should quarantine the USSR until it collapsed under its own weight and the stress of confrontation with the United States.

The People’s Republic of China, on the other hand, recognized the limitations of autarky and pursued integration with the world economic system through engagement with the capitalist states, and by membership in the World Trade Organization.

Therefore, People’s Republic of China did not remain a nation of impoverished farmers, albeit a billion farmers with nuclear weapons, globally isolated and vulnerable to U.S. containment, foreign and domestic subversion, and eventual overthrow.

Instead, we got a Communist government on the mainland that accounts for 40% of the world economy and has enough financial, social, and police state juice to stay on top of the heap domestically and compete with the United States for influence internationally!

This infuriates the China hawks, who see enabling China’s rise as the height of American folly. 

And they see the Trump tariffs as an important and long overdue battle in the long war to decouple the US economy from the Chinese economy and create more favorable conditions for an across the board cold war, polarization, confrontation, and classic containment. 

And business is getting the message.  Per the Post:

Under Trump's plan, the tariff pain on the $200 billion batch of Chinese goods will grow on Jan 1, 2019, rising to 25 percent from the original 10 percent.  If there remains little sign of diplomatic progress by that point, more companies may switch their orders from Chinese suppliers to factories in countries such as Vietnam or India, executives say.

On a meta level, you can consider this as “TPP with a meat axe”.  Barack Obama sought to isolate China via a free trade bloc excluding the PRC.  Donald Trump hopes to accomplish a similar objective by redirecting US imports away from China via tariffs.

As a tutelary deity of the China hawks, Aaron Friedberg put it:

"We're probably talking about a world with two centers: a China-centered economic domain...and another centered on the United States," said Aaron Friedberg, a professor of politics and international affairs at Princeton University, who handled China policy as an aide to Vice President Richard Cheney in the George W. Bush administration.  "It's heading toward a bifurcated global economy."

Hey, mission accomplished!  At least for China hawks, if not for multinational corporations yearning for that global payday.

The PRC’s rulers have a lot of good reason to believe the US isn’t just interested in trade fixes like improved access and a level playing field; the China hawks wants to use economic policy to roll back and weaken the Chinese state.

What are the Chinese going to do?  Well, the leadership has been thinking about this economic war a lot.

That’s because the People’s Republic of China has seen this movie before.  And it isn’t the collapse of the Soviet Union.  It was the attack on the export economy of Japan engineered by Ronald Reagan and James Baker in 1985, the so-called Plaza Accord coordinated intervention in the currency market by state banks that led to a 50% appreciation of the Japanese yen against the US dollar.

So in response to the Trump tariff campaign, the PRC is planning to move factories overseas; push domestic factories to upgrade their products and technology and look for new markets—ironically, boosting the Made in China 2025 program that supposedly terrifies the West; and also pump cash into the domestic economy to boost consumption and reduce the trade war shock.

And they are preparing for the long haul.

Jack Ma, the overlord of ecommerce giant Alibaba, predicted the whole US-China trade war dynamic will take 20 years to play out:

 Well, I wonder who’ll be on top in 20 years?  Maybe the United States. Maybe China.  Maybe nobody.  But 20 years is enough time for China hawks to pay off their mortgages and put another generation of their kids through college.

So there will be some winners.


Godfree Roberts said...

By 2028 China's GDP will be twice America's and her defense budget will be bigger.... Just sayin'

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Arioch, the said...

Decoupling from China to start war in 20 years (you can not replace all the Chinese parts, especially of computer chips kind that fast) may be the reason for the most radical wing of Team Trump.

But i think for less radical ones the name of the game is decoupling USA from foreign trade. That is, accepting inavoidability of "exorbitant privilege" collapse, which would bring down the debt infinity based US foreign trade. Then preempting this unpredictable in both time, scale and "direction" natural collapse with "controlled demolition" while it is still possible.

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Zircon Hypersonic said...

Its the rest of the world that will.decouple from the US financial system and collapse the US under the weight of its huge trillions in debt.

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